India

India moving forward and sometimes back – now again higher tariffs on certain imports

February 19, 2018, by Hubert Fromlet, Kalmar

India is not always easy to understand. At the World Economic Forum some weeks ago, Prime Minster Shri Narendra Modi presented himself as a dedicated supporter of free trade – more or less in the same way as China’s leader Xi Jinping did a year ago at the same place shortly before President Trump’s inauguration. For a couple of months, Xi was celebrated as a kind of new global defender of free trade and antipole to protectionist Donald Trump. During 2017, however, China was again accused more strongly of protectionism by the U.S. government, particularly because of its enormous subsidies to certain industries. Consequently, cross-border trade mood between the Trump administration and China deteriorated further in the course of 2017.

These American-Chinese tensions may partly explain Modi’s efforts some weeks ago in the Swiss mountains to back up free trade. Modi is, of course, aware of the increasing role that India plays in the world economy. India is already the seventh largest economy in the world – and even number three on a Purchasing Power Parity (PPP) basis. India’s GDP growth is right now in line with China’s. Demography, digitalization and the growing middle class give India good potential in theory –  “but the quality of education is still a serious concern”, as one can read in chapter 47 of the new budget.

On February 1, the Indian Minister of Finance Arun Jaitley introduced the central budget for the fiscal year 2018-2019 (i.e. from April 1 to March 31). India’s next general election has to be held by 2019. For this reason, the Indian budget for 2018-2019 is observed with quite critical eyes. Certain comments – also from abroad – have judged the overall picture of the Union budget document as populistic. In my view, this grading may be too strict. Many structural needs and concrete measures are announced in 61 pages. There is quite a lot of supply side policy in it. Check it out, use this link:

https://www.s-ge.com/sites/default/files/cserver/article/downloads/india_budget_speech_2018.pdf

So, what’s the reason for the criticism of being populistic? It is indeed – certainly surprising after the Prime Minister’s speech in Davos – that India introduces protectionist measures concerning a number of import goods which made the Trump administration very upset. Higher customs duties are proposed on, for example, imported juices, vegetable oils, furniture, parts of cell phones, and auto components. The reintroduction of long-term capital gains on stocks also surprises many observers.

Sure, India is a complicated country for economic policy since most central measures have to be accepted by the 29 different states of India (when they are affected by a central law). As an example, it took years to implement the necessary move to more indirect taxation by a so-called Goods and Services Tax (GST) – but now it is there nationally since July 1, 2017. Economic policy is easier in China than in in India – the latter country often regarded as the largest democracy in the world.

The recent tariff hikes announced in the budget on certain imports were obviously not a very wise decision, and one may wonder how many Indian jobs will be saved or created this way. The psychological damage may be considerably larger in a global economic climate where India indeed had gained credibility in recent years. Unfortunately, it will be widely concluded that moving back in economic policy remains an Indian option also in the future.

Thus, it is not the velocity of economic reform policy that really counts in the country analysis of India but the steadiness of moving forward. Also smaller moves back can do harm!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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No miracles in India – but improvements

June 7, 2017, by Hubert Fromlet, Kalmar

India’s GDP grew by 6.1 percent in the first quarter of 2017 compared to the first quarter last year. This was below expectations and the average annual GDP growth from the second quarter of 2016 until the first quarter in 2017 (7.1 percent).

Both private consumption and investment contributed to the slight downsizing of the Indian economy. Many analysts see the enormous reduction of the money supply last fall being responsible for this development (objective: combating corruption)

This may have been partly the case. But in my view the Indian economy is not as strong as it currently is described by many economists. Still India’s institutional shortcomings are too much of a growth burden.

However, there have happened institutional improvemens in India in the past two decades or so. Thus,  potential growth in India has grown. But it would be the wrong analytical way to continue to compare the ongoing Indian GDP changes with the Chinese ones (which often is done). These countries are in many – or even most – respects completely different.

Pure GDP-growth numbers do not teĺl us too much about the medium-term outlook for the Indian economy either.

Therefore, I also look very much at the annual publication of the World Bank called “Doing Business”. Here we can read quite a bit about institutional changes in different countries – institutional changes that to a high extent determine economic long-term conditions in both China and India (and other countries).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Modi’s victory – India is awarding its PM

March 16, 2017, by Hubert Fromlet, Kalmar

India’s Prime Minister Narendra Modi and his governing, hindu-nationalist party BJP (Bharatiya Janata Party, BJP) is currently celebrating happy days after the strong victory in the regional elections in the 220-million people state of Uttar Pradesh. This overwhelming result was not really expected after the chaotic currency reform last fall when the government abruptly invalidated almost 90 percent of the circulating bank notes. This measure was taken in order to make people to deposit money visibly at the bank – and, consequently, to combat corruption and black money.

In other words, Modi benefited even from this monetary/institutional reform, expressed by substantial popularity gains. Hopefully, Modi uses his current strong personal ranking for accelerating economic reforms, particularly since his chances of winning the next general elections in 2019 seem to be increasing. So far, Modi’s (and his coalition partners’) reform record is not really convincing. Much more must be done to improve, for example, (youth) unemployment, education, infrastructure, the environment and productivity. At the same time, it is obvious that many Indians still have high expectations that Modi is the man to move their huge country forward.

For 2017 and 2018, a GDP-growth rate around 7 percent seems to be achievable (if major global distortions can be avoided). One should not forget that India’s international trade exposure should be less sensitive to American and global trade distortions than China’s. Indian GDP-growth seems to develop (somewhat) faster than the Chinese in the next few years. Such a comparison is, however, not quite fair since China started its accelerated modernization and restructuring process much earlier than India did.

But India has now an improving chance to catch up!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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